By Tezcan Gecgil, PhD
(Prices and figures are of Aug. 21, 2020)
So far, 2020 has been a great year for gold bulls. Year-to-date, the precious metal is up about 27% August saw gold price jump to over US$2,000 per troy ounce. Now, it is hovering at $1,943.
Previously in September 2011, gold had made an all-time high when it had hit $1,921. So despite the pull-back in recent days, we are still above that level in 2011.
Many analysts agree that the performance of stocks is usually negatively correlated to gold. The commodity tends to do well when there is fear in equity markets. However, since March that relationship has not entirely held up. Following the coronavirus induced plunge, many stocks have also staged impressive run-ups in price after mostly hitting 52-week lows.
Yet as we approach the final quarter of the year , there may still be a case for gold. If you agree with that analysis, there are several ways to include gold in your portfolio.
Catalysts Behind Gold Prices
2020 has been the year of news headlines regarding COVID-19 cases. Now, we are reading about a second wave of cases, especially in Asia, Latin America, and the US. In the coming days, the rest of the world may join these countries, too.
Given the effect of the novel coronavirus on health and economic conditions, investor sentiment could easily turn bearish, especially if risk appetite wanes during the upcoming earnings season.
Market participants have become bullish on the precious metal in 2020 due to cheap money available worldwide. Many central banks, including the Federal Reserve, have further cut interest rates to ease the pain of economic uncertainty. Economists are nervous as more debt has been issued and more money created than at any other time in history. There tends to be a negative correlation between interest rates and gold.
Furthermore, gold has typically been an important hedge against inflation risk. It has held its value very well during periods of high inflation. Many analysts debate whether higher inflation may be around the corner for most world economies.
Gold also has a limited role in industry. So, unlike other commodities such as silver and platinum, it is not directly affected by a potential economic contraction or recession.
How To Include Gold In Portfolio?
Financial planners usually recommend a 5% to 10% allocation of a personal investment portfolio to gold as an insurance policy. Investing in the physical asset is one option. Buying gold bullion is the most straightforward gold play global citizens tend to make. However, owning the physical commodity will also involve storage and insurance costs.
Another potentially less labor intensive option: exchange-traded funds (ETFs) that track the price of the commodity. Examples include the SPDR Gold Shares (NYSE:GLD) or SPDR Gold MiniShares (NYSE:GLDM). Year-to-date, they are both up around 28.5%.
GLD’s price move over the past year, and especially over the past several months, has been impressive. It’s currently hovering at $183.5.
From a technical perspective, the $175-level is offering support. And $190-level is likely to become a short-term resistance. In the coming days, I expect GLD could trade between $175 and $190. If the bulls have the upper hand, then $200 may well be the next target.
With September, the market’s attention is likely to turn to the US Presidential election. As a result, volatility in equity markets may once again kick in. In such a case, gold may start another leg up in the coming months.
It’s been a good year for the shiny metal. With prices shooting higher, should long-term investors be buying today? We believe the rally in gold will likely push the price beyond $2,000 once again and even higher during the rest of the year. Therefore, even a modest exposure in a long-term portfolio may be appropriate.
As always, research your investments carefully and invest in assets and companies you believe have a long-term future.